Official blog for the journal Integrated Environmental Assessment and Management: Timely news, discussions, and thoughts

Tax Havens Drive Environmental Degradation

The expansive and opaque offshore system used for tax-dodging all around the world — and detailed in the leaked classified files known as the “Panama Papers” and “Paradise Papers” released in the past few years — is responsible for significant losses of tax revenues, currently estimated at around US$500 billion annually. This offshore system, which includes a variety of so-called tax havens and is used by wealthy individuals, companies, and financial institutions, causes serious concerns related to the global economy and has a tremendously negative effect on the global fight to end poverty.

Now, a recent study paints a rather alarming environmental picture emerging from a previously hidden link between the corporate use of tax havens and unsustainable natural resource extractions. The study (Tax havens and global environmental degradation) published 13 August 2018, focuses on the impact of tax havens on the oceans and the Amazon rainforest. Oceans support fisheries that provide a major source of alimentary proteins and related income to populations worldwide and the Amazon rainforest is critical for stabilizing our planet’s climate system.

Victor Galaz, lead author of the study, said in a press release: “Our analysis shows that the use of tax havens is not only a socio-political and economic challenge, but also an environmental one. However, financial secrecy hampers the ability to analyze how financial flows affect economic activities on the ground, and their environmental impacts.”

Still, Galaz and his collaborators — through a systematic approach — were able to show that 70% of the known vessels implicated in illegal, unreported and unregulated fishing are, or have been, flagged under a tax haven jurisdiction. The majority of these vessels were registered in Belize and Panama, two countries considered “flags of convenience” states. These are states with limited monitoring and enforcement capacity, and neither impose significant penalties on vessels sailing under their flag — even if they break international law.

Amazon Forest by Oregon State University

In addition, the researchers found that almost $27billion of foreign capital was transferred to key companies involved in beef and soy production in the Amazon forest between 2000 and 2011 — and of the $27billion, 68% was transferred from tax haven jurisdictions. Notably, beef and soy production carried out in the Amazon forest is a driver of deforestation. The researchers found that the Cayman Islands are the largest transfer jurisdiction for foreign capital to key companies operating in the Brazilian Amazon. This well-established tax haven provides three benefits to investors: legal efficiency, tax-minimization, and secrecy.

Elaine Gilligan, international campaigner at Friends of the Earth, told The Guardian: “This is dirty money, used for fueling illegal activities that are driving the global environmental crisis. Aggressive tax evasion deprives communities of funds needed for a range of measures, among them environmental protections that play a part in fighting climate chaos.” Policymakers have mostly ignored these serious environmental consequences during international discussions about tax havens.

However, although the study clearly shows a link between capital flows via tax havens and environmental degradation, it does not establish causality. According to Galaz and his collaborators, the use of tax haven jurisdictions poses major challenges to transparency and makes it currently difficult, if not impossible, for scholars and policymakers to track international flows of capital and associated social and ecological impacts. However, despite the lack of demonstrated causality and the numerous challenges ahead, they hope that their analysis not only will trigger further research, but will also help develop policy that would place tax havens on the global sustainability agenda.